Innovative Crop Insurance Comes to Colombia

Blue Marble and Nespresso are bringing weather-indexed microinsurance to coffee-growers in Caldas, Colombia. For many, it’s their first opportunity to obtain crop insurance.

By Bethany Haye

Coffee farmers worldwide are facing a slew of urgent challenges. One of the most threatening is climate change, responsible for increasingly severe weather events that devastate crops and can leave smallholders financially ruined with no resources to re-start their operations. 

In a small-scale survey, researchers asked 45 coffee farmers how, if at all, climate change had affected them. More than 90% percent reported changes in average temperature; 74% said droughts had become longer and more severe, and 61% reported an increase in mountainside erosion and landslides because of more rain.

“They also noted impacts of these changes on their crops: 91% reported changes in the flowering and fruiting cycles of the coffee plants… Because the planting and harvesting seasons are no longer regular or predictable, many farmers can’t rely on traditional seasonal indicators to guide them on the right time to plant, harvest or tend to their coffee crops.”

Up to now, growers have largely been left to their own devices, or if they’re lucky, benefitted from small government subsidies when weather destroyed their crops. But so far, insurance schemes have not helped farmers in a major way. The Colombian agricultural insurance market is still not well-developed in 2019.

Now, Blue Marble and Nespresso have joined in a pilot program to bring weather-indexed microinsurance to coffee-growers in Caldas, Colombia, the first time most of these growers will have owned insurance policies.

Building on a relatively recent formula for ensuring farmers against weather-related risk, the parametric insurance policies cover higher-than-expected rain and drought during the periods of the year when coffee beans are young and most susceptible to weather shocks. Here’s why this new approach stands a chance of working where previous insurance schemes have failed.

In the past, programs introduced by huge conglomerates not specialized in agricultural – Spanish insurance giant Mapfre in 2005 and 2007 and in 2011 by Venezuelan insurer Previsora – never gained traction. The Colombian government got involved for the first time in 1980 through the state-run Caja de Crédito Agropecuario, Industrial y Minero to insure crops and livestock as well as backing loans to farmers. In those low-tech, low-infrastructure days, data was scarce, and the offer was not well-adapted to growers’ needs. It was also a losing venture for the insurers, as premiums had to be low, risk was high, policies and claims were poorly researched and managed. Only very high-risk holders bought policies, and companies regularly ended up paying out more than they took in while at the same time leaving many holders with nothing. 

After the devastating 1992 El Niño, the worst in history, there were some attempts to launch and sustain agro-insurance, notably for smallholders. But, so far they have not attracted a lot of uptake. Farmers essentially don’t trust insurers because even though premiums are low, they add to costs for growers, and badly structured policies mean they often receive nothing when crops are damaged or even destroyed: the terms and conditions for collecting don’t fit the realities of what ruins crops and how.

In 2015, the total farmed land area in Colombia covered by insurance was 2.4%. Coffee sector coverage was so low it did not even figure in World Bank agricultural insurance reports.

Enter weather-indexed microinsurance. Index insurance is insurance that’s linked to an index, such as rainfall, temperature, humidity or crop yields, rather than actual loss. First introduced for other crops in 2015, it will hopefully take hold in the coffee sector thanks to the pilot program in Caldas.

This type of insurance, specially tailored to smallholders, combines low premiums with risk shared by a consortium of insurers. But most innovative and important, it uses both satellite technology and past data to estimate losses due to weather events: researchers take historical records of crop yields, average them out over the years, and compare them with lower yields after weather damage — floods, mudslides, etc., as well as the relatively recent vegetation imagery — as shown by satellite and data from rain gauges near the grower’s plot. If these data show the rainfall amount is below the threshold, the insurance payouts are triggered automatically and directly to the grower’s bank account. This eliminates the need for assessors to go on-site and verify the damage on the ground. All this keeps their costs down and premiums lower. This also reduces “distress sales” of assets. The process also removes moral hazards such as the ‘perverse incentives’ of crop insurance, where in certain conditions farmers may actually prefer their crops to fail so that they receive a payout. With index insurance, the payout is not linked to the crop’s survival or failure, so the farmer still has incentives to make the best decisions.

Insurance consortium

Blue Marble Microinsurance is a consortium of nine companies set up to provide commercially viable insurance options to low-income individuals and co-operatives. The consortium includes American International Group; Aspen Insurance Holdings; Guy Carpenter & Company, LLC; together with Marsh & McLennan Companies; Hamilton Insurance Group; Old Mutual Emerging Markets; Transatlantic Holdings; XL Insurance (UK) Holdings; and Zurich Insurance Company, and the latest addition, ASSA Insurance (Panama).

The pilot program was founded with support from local farmers from the Aguadas and Norte de Caldas cooperatives in the department of Caldas and started with 1,975 participating farmers with territory covering 5,724 hectares.

Cooperatives in Caldas have democratically chosen to use their Fairtrade International premiums to pay for the pilot weather index insurance program-specifics from Norte Caldas Cooperative.

“Having an insurance solution that protects our members from the devastating effects of climate change is critical for the cooperatives,” said Cesar Julio Díaz, Head of the Aguadas and Norte de Caldas cooperatives.

Nespresso and Blue Marble intend to expand this program to other regions outside of Caldas in the future, according to the National Federation of Coffee Growers of Colombia (FNC).